Briefly: In our opinion, speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward point of view.
With the exception of yesterday’s temporary downswing in the precious metals sector, nothing really happened in terms of price action. The Fed left the rates where they were as we expected it to and now we are likely to see the return of the previous trends. Let’s take a closer look, starting with gold (charts courtesy of http://stockcharts.com).
Gold remains within the declining trend channel and thus nothing really changed.
From the short-term point of view, nothing really changed either. The volume was not as tiny as it had been on Monday – it was rather average. During yesterday’s session gold moved back and forth so the increased (compared with what we’ve seen so far this week) volume doesn’t have bullish implications. The combination of the above and in particular the long-term chart continues to suggest that the next big move will be to the downside and that this week’s upswing was only a correction within a decline.
In today’s pre-market trading gold is moving once again to / a bit above the 61.8% Fibonacci retracement level, but that doesn’t change anything. Interestingly, the USD Index has moved lower today and when the USD Index was at similar levels in the past gold was higher (there has been no new high today) – thus we can say that gold is not really willing to react to bullish signals.
Meanwhile, silver also moved a bit higher today, but it remains well below its May 2015 high, so nothing really changed and the outlook remains bearish. Our previous comments about the bearish implications of high volume in silver remain up-to-date.
We can say the same about gold stocks – they are close to their 2015 high, but not breaking above it. This, plus the position of the RSI indicator (extremely overbought) suggests that lower prices are just around the corner.
Speaking of gold stocks, the DUST ETN is scheduled for a 10:1 reverse split, but we don’t think this will have important implications for the outlook. The price of DUST and other ETNs is based on and closely connected to the prices of mining stocks. If all these individual stocks were scheduled for a reverse split, we could discuss potential bearish implications, but since we are discussing only an investment vehicle that is designed to simply mimic and multiply the moves in the sector, we don’t think there will be any material impact. In other words, since DUST is not an asset with a price driven by individual supply / demand issues, but rather an instrument with a price based on some other assets, it is unlikely that a split or a reverse-split would have any impact on assets that its price is based on. It is also due to this reason (and due to the time decay factor) that technical analysis of DUST, NUGT and other leveraged ETNs is rather pointless (the analysis of volume could be an exception in some cases, though).
While describing the situation in gold, we mentioned the USD Index, which has declined today. At the moment of writing these words it’s at 93.75. Why did the USD Index decline? It can be attributed to a big increase in the value of the Japanese yen. Why did it increase? Because nothing happened. As odd as it may sound, let’s keep in mind that the market reacts to all “news” only relative to expectations. The Bank of Japan was expected to provide the market with new monetary stimulus and… it didn’t. In the absence of expected action that was supposed to weaken the currency and that was to a considerable extent already factored in the price, the value of the yen moved up. Since the USD/JPY exchange rate is the second biggest component of the USD Index (EUR/USD being the biggest one), the above impacted the USD Index in a negative way and thus we saw a decline today.
Consequently, what we are seeing today in gold and silver is not really strength in gold or silver – it’s just a reaction to a more or less random event. The lack of additional stimulus is actually a bearish factor for gold for the medium term, but the initial reaction is bullish simply because the USD weakened.
What are the implications? There are little implications, in our view. The USD moved lower, more or less to its previous April low, but there was no breakdown. Consequently, it’s likely to move higher based on this resistance. If not, then it’s likely to rally based on the long-term support levels that you can see on the chart below.
The long-term support levels are not far from where the USD is today, so even if we see a decline, it is not likely to be a big move.
Summing up, nothing changed based on yesterday’s comments from the Fed, just as we expected, and it seems that the downtrend in the precious metals market can now resume. Based on the no-action comments from the Bank of Japan, we saw price moves in the USD Index and precious metals, but it doesn’t seem that they will result in bigger price swings. The support is close in case of the USD Index and the resistance is close in the case of gold, silver and mining stocks. Consequently, we think that a short position (full) in gold, silver and mining stocks is justified from the risk to reward point of view. It’s rather unclear, but it seems that a decline should start within the next several days and it could remain in place for a few months (no market moves in a straight line and there will be corrections, though).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:
- Gold: initial target price: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $47.15
- Silver: initial target price: $12.13; stop-loss: $18.05, initial target price for the DSLV ETN: $61.16; stop-loss for DSLV ETN $26.80
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.07, initial target price for the DUST ETF: $5.72; stop-loss for the DUST ETF $1.74
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $36.37
- JDST ETF: initial target price: $8.86; stop-loss: $2.27
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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